Understanding CRA Reform

Understanding CRA Reform

An overview and comparison of the Federal Reserve’s CRA ANPR and the OCC’s final ruling

Since its enactment in 1977, the Community Reinvestment Act (CRA) has been an important tool in addressing redlining and the lack of investments in low- to middle-income (LMI) communities. It requires banks to meet the lending needs of their community, including credit-worthy LMI individuals and minority-owned businesses. However, it has failed to keep pace with today’s evolving banking environment or improve credit accessibility for those it was designed to protect.

It’s been more than 25 years since the last revisions to the CRA, and during that time mobile and digital banking has grown in popularity without being addressed in CRA requirements. In addition, the gap between black and white home ownership is 3% greater than it was in 1960.1 It’s clear that the CRA needs to be revisited and updated. This article will compare and contrast the OCC’s and the Fed’s efforts to strengthen and modernize existing CRA requirements.

The Office of the Comptroller of the Currency

The OCC released an Advanced Notice of Proposed Rulemaking in August 2018. The FDIC joined the OCC and released a joint Notice of Proposed Rulemaking in December 2019 and opened the floor to stakeholder comments to help inform and guide the final ruling. Citing the need to focus on issues related to the 2020 COVID-19 pandemic, the FDIC removed themselves from the rulemaking process. In May 2020, the OCC released their final ruling, which includes, but is not limited to:

  • Clearly enumerating CRA qualifying activities
  • Defining assessment areas
  • Establishing performance standards
  • Establishing data collection and retention requirements

While the final rule went into effect on October 1, 2020, banks subject to general, wholesale and limited performance standards have until January 1, 2023 to comply. Intermediate and small banks must comply with the ruling by January 1, 2024.

The Federal Reserve

In September 2020, the Fed released an ANPR on updating their CRA regulations with a 120-day comment period ending February 16, 2021. Stakeholders “have expressed strong support for the agencies to work together to modernize CRA.”2 Stakeholders were asked for feedback regarding the Fed’s efforts to:

  • Bring greater clarity, consistency, and transparency to performance evaluations
  • Minimize data collection and reporting burden
  • Base performance evaluations on bank size, business models and local conditions
  • Clarify and expand eligible CRA activities in LMI communities
  • Recognize the special circumstances of small banks in rural areas

Their intent is to ensure LMI banking needs are met, promote financial inclusion and address changes in the banking industry over the past 25 years.

How they differ.

Both reform efforts seek to align CRA requirements and reporting with today’s banking needs, from modernizing assessment areas to clarifying eligible activities for CRA credit. However, the approaches differ in a few areas.

While the OCC rule was finalized, the FED ANPR is still accepting comments. Pundits believe there is still time for the agencies to come together to provide uniform regulations, as stakeholders across the board have requested.

Be ready for your next CRA examination.

Understanding updated CRA requirements, from whichever regulatory body you report to, is essential to receive the CRA credit your bank has earned. At Marquis, we’ve kept and continue to keep our finger on the pulse of the CRA modernization process. When it becomes time to implement new CRA regulations, Marquis compliance experts will be ready. Marquis has a proven history of helping clients tell their CRA story.

“Our recent CRA Exam was truly a team effort, involving our Production Officers, CFO, Investment Officer, CRA Committee and some invaluable help from Marquis,” says Roger McLaren, Vice President, Inwood National Bank. “With CRA, like in life, you have to keep score, tell your story and pat yourself on the back. In the end, it comes down to solid record-keeping. Between our efforts, Marquis Software’s ability to sort and organize our data, and assistance from Marquis Compliance Professional Services, we were able to assemble the data we needed, analyze the results, and verify our success. It all culminated in an Outstanding CRA Exam rating.”

Contact us at [email protected] to see how Marquis is addressing this much-needed change to the CRA and how it affects your institution.

 

 

1 Urban Institute, Reducing the Racial Homeownership Gap https://www.urban.org/policy-centers/housing-finance-policy-center/projects/reducing-racial-homeownership-gap

2 Federal Reserve, Fact Sheet on the Community Reinvestment Act, Advanced Notice of Proposed Rulemaking, September 2020 https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200921a1.pdf

PPP, CRA and Fair Lending – How the Payment Protection Program Affects Compliance Reporting

2020 has been a year of incredible disruption. As the country and rest of the world deal with the fallout of the COVID-19 Pandemic, small businesses struggle to stay viable, retain employees and cover operating expenses. The Coronavirus Aid, Relief and Economic Security Act (CARES) was implemented to supply much needed economic relief.

The Payment Protection Program (PPP) portion of the CARES Act offered small business owners a means to meet their financial obligations. However, there are inherent difficulties involved. Business owners found supplying all the appropriate documentation and certificates to be a complicated process while financial institutions struggled with constant updates, unclear guidance and inadequate resources.

Regardless of whether ill intent was involved, protected classes did not consistently receive the aid they needed. This became apparent in May when a Unidos US survey1 was released. Of the Black and Latino small businesses requesting relief, over half asked for less than $20,000 to cover employment and operating expenses. Of those, 12% received the funding they requested and 41% received no help at all. 21% were still waiting to hear if they qualified. Examiners and regulators will be looking closely to make sure your institution lives up to regulatory expectations.

Reporting continues as usual.

Despite the difficulties, PPP lending will be considered when evaluating CRA and Fair Lending. PPP loans can be eligible for CRA credit if you know what you’re looking for, but that can be difficult to do.

Because PPP rolled out so quickly and the volume of requests was so large, many financial institutions were required to reallocate untrained resources to loan processing as a result. And with the August 8, 2020 extension, loan processing is still eating up valuable time and resources. Due to unfamiliarity with the documentation and application process, many of the reallocated personnel may not be aware of Fair Lending and CRA requirements and how it affects their financial institution. This has the potential to make it even more difficult to meet the demands of CRA and Fair Lending expectations.

Helpful Guidance

The best way to protect your institution from compliance risk remains the same as it was before COVID-19 became our new normal.

Document. Test. Monitor. Train.

Clarify what has happened with your loan processes to this point and get down the details now. Why were loans that were denied dispositioned in the manner they were? What procedures may have changed and why? How were fraud attempts dealt with? Then get your story down, including how you intend to rectify any at-risk policies. Once noted, leverage that knowledge to make sure protected classes are truly protected during PPP loan processing and the loan forgiveness stage.

Correct anything that can be fixed now, document and explain oversights and the actions taken to fix them and train your loan personnel top to bottom. Then review procedures and follow up on your actions to ensure you’re moving in the right direction. Finally, keep your Compliance Management System (CMS) up to date and your team, including the Board, on the same page. This is often an overwhelming and time-consuming endeavor. You don’t have to face it alone.

Marquis – here when you need us.

Let Marquis become your compliance partner. We offer a two-prong solution to help you get the CRA credit you deserve and tell your compliance story successfully.

CenTrax NEXT, our proprietary compliance system created exclusively for the financial industry, enables you to assemble, analyze and act on your data. This is not a software solution released in response to the current situation. CenTrax NEXT is a proven compliance reporting solution that will continue to deliver value well past COVID-19 and its fallout.

We also offer guidance with Marquis Professional Services. Our team of dedicated experts continues to stay current on the frequent updates, fluctuating requirements and possible reporting issues of PPP and all of their ramifications. Their job is to alleviate your stress, offering you the guidance you need to identify possible risk areas and develop your story.

Just as your financial institution stepped up to help your customers and members, Marquis is here to help you navigate the often-confusing demands and requirements when reporting your PPP loans for CRA and completing Fair Lending analysis. Please get in touch to find out more about CenTrax NEXT and Marquis Professional Services.

Sources

1 Unidos US http://publications.unidosus.org/bitstream/handle/123456789/2051/UnidosUS-Color-Of-Change-Federal-Simulus-Survey-Findings.pdf?sequence=1&isAllowed=y

HMDA and Public Access to New Data

How HMDA data and increased transparency can affect fair lending.

HMDA submission season is just around the corner and your institution’s data will be under close scrutiny by more than regulators. Litigators, advocates and the general public can view the data and possibly use it to identify institutions at fair lending risk. But since HMDA data alone is not enough, this can lead to misinterpretation, unwarranted accusations and loss of reputation. To help mitigate these issues, maintaining HMDA data integrity is essential.

The Home Mortgage Disclosure Act (HMDA) was created to enhance the monitoring of lending patterns and to ensure financing needs are met across a diverse field of potential borrowers. Submitting loan origination and application data on borrower demographics and loan features enables enforcement agencies to identify financial institutions who excel at fair lending and those that require further investigation. In order to accommodate that goal, new data points were added in hopes to further keep biases in check and reduce barriers to homeownership for protected classes.

The new data delivers a deeper understanding of institutional borrowing practices. Regulatory agencies can now apply comprehensive data screening, data monitoring and statistical modeling routines across all lenders subject to HMDA reporting requirements. In addition, many of the new HMDA data fields, like age, credit score and debt-to-loan ratio, can be used for more effective identification of institutions with elevated potentials of fair lending risks.

With the release of the new data, 2020 is the first time members of the public will have greater access to some of the key determinants of underwriting and pricing decisions. Be assured, litigators and advocacy groups will be taking a close look for any sign of unfair practices. Since disparities are estimated after a broader range of pricing and underwriting factors are applied, litigators can present more credible fair lending cases that on the surface appear to be true than with previous HMDA data sets. Furthermore, journalists will also have access to the data, possibly increasing marketing and reputational risks.

Peer analysis also benefits from the new data. Because it is accumulated from all covered financial institutions, it is particularly helpful for defining local and national benchmarks. Peer comparisons can be expanded beyond penetration rates in minority census tracts to include APR, total loan costs, product features and so on. A clearer picture is presented, allowing regulators to more accurately compare benchmarks and identify institutions with elevated fair lending risks.

With more public access to HMDA data, regulators advise caution when interpreting this data, especially if it leads to accusations or conclusions of discrimination. According to a FFIEC Press Release, “HMDA data alone cannot be used to determine whether a lender is complying with fair lending laws. The data do not include some legitimate credit risk considerations for loan approval and loan pricing decisions. Therefore, when regulators conduct fair lending examinations, they analyze additional information before reaching a determination about an institution’s compliance with fair lending laws.”

In today’s world, businesses rise and fall on the whims of public perception. An unsubstantiated claim of discriminatory lending practices based on misinterpreted data could have far-reaching consequences. What can financial institutions do to protect themselves? Understand your data, especially when underwriting and pricing decisions can create and identify disparities. Realize how your data can be interpreted by public regulators, advocacy groups, journalists and litigators. And then be prepared to tell your story and/or present the corrective and preventive actions taken.

The only way to minimize or eliminate risk is to consistently monitor and analyze your own data for pricing, underwriting and redlining risk. Keeping data clean and relevant is essential for accurate interpretation. In addition, separate assessments should be conducted to identify possible anomalies generated by the expanded data fields. This can be an intensive undertaking. Automated compliance software for HMDA reporting will help ensure data accuracy. At the same time, it will help identify fair lending risk points in the application and origination process. When combined with analysis and interpretation, you should be able to identify any additional risk factors.

Marquis can provide a turnkey solution when combining industry-leading tools like CenTrax NEXT compliance software with the experienced and intuitive skills of the Marquis Compliance Professional Services experts. These services can make a great difference in your HMDA reporting process by regularly monitoring and cleaning your data and then helping you understand the HMDA Integrity Analysis. With cleaner data and a deeper understanding of how it can be interpreted, your institution will be better able to respond when your HMDA data is used by regulators and the public to evaluate fair lending risks.

The SCRA – What to Do When Compliance is the Only Option

When duty calls, our military members don’t always have the time or means to care for their finances. The Servicemembers Civil Relief Act (SCRA) requires creditors to reduce interest rates on certain loans, prohibits foreclosures without a court order and allows servicemembers to terminate motor vehicle and domicile in certain instances.

Something to come home to.

The SCRA safeguards active duty servicemembers, reservists, active-duty members of the National Guard and, in limited instances, spouses and dependents. It calls for postponing or suspending certain financial obligations taken on before service began and, for a specified period, post-service. This is how financial institutions help our troops maintain their pre-service financial standing so they can come home to something that’s still worthwhile.

Noncompliance has a cost.

SCRA examiners concentrate on key areas; no reduced APR on loans and credit cards, foreclosures without a court order, repossessions, and apartment and vehicle lease terminations. If active members are not properly identified, a financial institution may be liable for fines, penalties and settlements. In today’s pro-service atmosphere, the reputation hit can lead to the loss of current customers and the distancing of new ones.

Be proactive.

Although required to inform banks and credit unions of their service status, the onus of identifying active military members and affording them their SCRA protections and benefits falls directly upon the financial institution. When a SCRA request is submitted, it is vital to record where it is routed, who reviews it, who approves benefits and who informs the borrower about request status. Your Compliance Management System (CMS) can help make that happen with effective policies and procedures.

Training—It all begins with knowingwhat to look for and how to proceed. Offer regular SCRA training to employees, especially those extending or servicing loans and credit. They should understand compliance obligations to identify active military and ensure they receive the proper protections and benefits. Then make sure employees have the knowledge and tools to identify qualified servicemembers and their dependents.

Internal Controls—Provide clear policies and procedures for SCRA compliance requirements, servicemember identification, loan documentation and other relevant material that demonstrate your institution is doing all it can to be in compliance with the SCRA.

Monitoring—As with all compliance requirements, regular monitoring is essential to ensure SCRA policies and procedures are effective. With the often unforgiving nature of SCRA exams, internal reviews and audits can be a preemptive strike against noncompliance as they identify policy exceptions requiring corrective action.

Identification—In addition to documentation provided by the servicemember, there are two powerful tools you can easily access to identify and monitor customers eligible for protection; the Defense Manpower Data Center (DMDC) and your Customer Information System (CIS). The DMDC is essential to identify and authenticate status. Your CIS, through onboarding and other customer touchpoints, can identify and flag accounts of servicemembers and their dependents.

Complaints—A clearly documented procedure dedicated to SCRA complaints and their path to resolution may prevent issues from coming under the microscope of examiners and give a heads-up to similar problems.

The Benefit of Outside Compliance Experts

The SCRA is one of our oldest protections acts, with similar temporary statutes initiated as early as the Civil War. Made permanent law in 1940, the Act is often updated and riddled with ambiguities, making it open to interpretation, a recipe for misperception and noncompliance. Understanding and staying up to date with the SCRA create a drain on manpower for an already overworked compliance team. An outside party can help navigate these murky waters and alleviate demands, allowing the team to concentrate on other compliance issues.

Marquis Compliance Professional Services, known for their expertise and personal service, are well-versed in all aspects of compliance, including SCRA requirements. They can perform audits and assessments to ensure you have the necessary policies, processes and procedures in place and define areas that need attention. By utilizing third-party compliance experts, you’ll have a fresh view of your SCRA compliance practices and how to improve them.

Conclusion

Self-identification as active military to financial institution is not always a priority for our servicemembers. However, financial institutions are often answerable for servicemembers not afforded the protection and benefits of the SCRA. A robust CMS with clearly defined SCRA policies and procedures is essential. Third-party experts, like Marquis Compliance Professional Services, can help your bank or credit union stay in compliance and away from violations.